June 2011

January 06, 2010

Tax Rates and Education Withdrawals

One more thought on taxes and IRA withdrawals for education.Let’s say you made the contributions while you were younger and in the 15% or 25% tax bracket.You made your contributions.You got your tax deduction from those contributions and you’ve been watching the account balance grow for a number of years.

Now, you’re a little older and paying taxes at the 30% or 35% range.Boom, you take a withdrawal for education that avoids the 10% penalty.Smack, the IRS takes 30% or 35% of your withdrawal, because that’s your current tax rate.Slap yourself on the forehead because you were expecting to be in the 10% tax bracket when you retired in several years.

Okay, so you saved 15% on your smaller contributions.You were taxed at 35% on larger withdrawals, and you avoided paying only 10% tax in retirement.Boy, that sure wasn’t very smart, was it?